Secondary market ROI

Dominique Galland

• 13/06/2025 09:57
• Edytowano

Hello

I do not fully understand how the secondary market figures are calculated. Based on the following example (see picture below), can you please explain:

a) how is the YTM calculated, in relation to the "Expected Interest" value ? 

b) more importantly, is the YTM estimate based on the initial price of the asset, or the price at which it is currently offered for sale ? (I assume the latter, but I just want certainty)

Thanks,

Dom

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  Lucja (Mintos)

  Community moderator

  • 16/06/2025 11:31

  Hi Dominique Galland, thanks for your question, happy to clarify.

  a) The Yield to Maturity (YTM) on the Secondary Market represents the expected annualized return assuming the investment is held until maturity and all scheduled payments are made on time. It takes into account both the Expected Interest and any potential capital gain or loss from buying at a premium or discount.

  So, if a note is listed at a premium (higher than its nominal value), your actual return will be lower than the nominal interest rate, even though the Expected Interest value stays the same. This is because you’re paying more than the principal amount you'll eventually get back. That difference reduces the effective yield.

  b) You're right in your assumption, YTM is calculated based on the price at which the asset is currently offered for sale on the Secondary Market, not its original purchase price.
  
  This is important because it reflects what you, as a potential buyer, would pay today — including any premium (which lowers the YTM) or discount (which raises it).

  Why YTM Might Appear Lower? 
  In your example, the YTM is lower than the note’s annual interest rate due to a premium added by the seller. This is expected behavior. Even though the interest payments are unchanged, paying more upfront means your return relative to your investment is reduced.

  In Summary

  • YTM is based on the current quoted price, not the original investment.

  • It reflects all expected cash flows: interest, principal, and pricing difference.

  • It's a helpful way to compare investment opportunities on a like-for-like basis, especially when trading at non-par prices.

  Hope this helps!

  
  
  
  

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